World

Ukraine central bank curbs forex purchases

KIEV (Reuters) - Ukraine's central bank said on Thursday it had introduced restrictions on certain types of foreign exchange purchase to help defend the stability of the banking system at a time of volatility in the currency market.

In measures it said followed efforts to stabilise the hryvnia in recent weeks - during which political conflict in Ukraine has alarmed investors - the National Bank of Ukraine also said it would be offering extraordinary tenders to support banking liquidity, with funds available up to 360 days.

The bank, which has used reserves intervening in the market but has failed to prevent a 10-percent slide in the hryvnia since November, did not publish full details of the measures in two news releases issued long after banks closed for the day.

It said restrictions on foreign exchange purchases would not limit payments for education and healthcare abroad, transfers for people moving their country of residence or the payment of salaries of non-residents in Ukraine.

However, international bankers said such restrictions would disrupt trade and could create a parallel market in the Ukrainian currency, which the central bank has been struggling to hold steady on a dollar peg. The hryvnia fell below 9 per dollar on Wednesday for the first time in five years, though it steadied on Thursday to be fixed at 8.9838 per dollar.

"Taking account of the volatility in the hryvnia exchange rate and tensions in the currency market, the National Bank of Ukraine has taken a range of measures in recent weeks to support its equilibrium," the central bank said.

"Notably, the National Bank of Ukraine has increased its presence in the interbank market and has used the mechanisms and instruments it possesses for currency stabilisation.

"These measures have had a clearly positive effect. However, they had a limited effect due to the unfavourable effect of a variety of internal and external factors, including the sharp devaluation of the national currencies of the group of emerging market countries," the bank said in its statement.

The restriction on currency purchases would, it said, "facilitate the stability of the national banking system".

"DESPERATION"

Timothy Ash of Standard Bank said that if the central bank was trying to "balance" the market, then "it's not really a market".

"This is just a sign of desperation and will further the scarcity of FX, disrupt trade and economic activity, and make an already difficult situation that much worse. The danger is that this just creates a parallel market," he said.

"Further, the move will hardly win friends and influence people at the IMF, who have long been calling for a more flexible exchange rate regime," Ash added.

In a separate statement, the bank said it had, within the bounds of standard monetary procedures, created a mechanism for supporting bank liquidity that would maintain public confidence in the banking system in the event of a deterioration in market expectations and facilitate its stable operation.

The director of the bank's monetary policy department, Olena Shcherbakova, said: "I want to stress that today we are not seeing a critical outflow of funds from banks. This mechanism is intended principally as a preventive measure.

"We want banks, and the people of Ukraine, to be confident that, whatever happens, the banks are capable of fulfilling their obligations to citizens in a timely and complete manner."

Such confidence would underpin stability in banking activities even if market turbulence increased, she said.

Collateral for refinancing could include Ukrainian state debt or foreign currencies, including dollars, euros, British pounds, yen and Swiss francs.

(Reporting by Alastair Macdonald in Kiev and Sujata Rao in London; Editing by Andrew Heavens)